Benefits Outsourcing: 5 Factors That Impact Cost Savings

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By Dave Foxall

The Truth about Benefits Administration Outsourcing Cost Savings

The Society for Human Resource Management cited a recent government survey that suggested benefits costs were averaging 43.6 percent of wages and salaries, and that given the continued growth in the expense associated with health care and pension plans, the costs of employee benefits would only get higher in the coming years. The same year, a PricewaterhouseCoopers survey (The Hidden Reality of Payroll & HR Administration Costs) examined the total cost of ownership (TCO) of various HR functions, including benefits administration; concluding that one of the top cost reduction strategies, measured by overall TCO, was outsourcing. As PwC put it, “organizations managing …health & welfare benefits in-house using premise-based or hosted software solutions spend on average 18% more administering these functions than organizations that outsource these functions.” On the face of it then, this would seem to be a cost reduction in the same vein as payroll outsourcing; essentially an offer that no organization could afford to ignore. Interestingly though, an ADP study of benefits outsourcing found that although the stated reasons for benefits outsourcing focused on service improvements (like boosting employee engagement) and assistance with legislative compliance, the number one assessment criteria when choosing a third party service provider was cost. However, in order to fully realize the potential cost reductions inherent in benefits outsourcing, a number of key factors must be reviewed and balanced.

Benefits Outsourcing Cost Factor #1: Company size

Employee population will undoubtedly have an impact on service fees and the larger the company, the more cost effective deployment of enhancements such as employee self-service (ESS) will be. However, company size does not necessarily influence the differential between outsourcing and insourcing. In fact, a Sourcing Analytics study (Benefits Administration: The Impact of Outsourcing on the Total Cost of Ownership) looked at three population categories (1,000 to 1,999; 2,000 to 4,999; and 5,000 and above) and found, “The three groups demonstrated the same relative cost relationship across each of the differing size groupings. Within each of the company size groupings, we see the outsourcing TCO is lower than in-house administration. We also see that outsourcing with call center is the least expensive.”

Benefits Outsourcing Cost Factor #2: Complexity of service

Complexity may be defined any number of ways, but generally speaking encompasses the number of plans requiring management; the level of data exchange with carriers; and the work involved in proper legislative compliance. Again, more complex programs will attract higher fees on the surface however; there is a clear economy of scale associated with the amount of work that is outsourced. The aforementioned PricewaterhouseCoopers research came to a clear conclusion when considering these factors; stating, “Organizations outsourcing multiple functions to a single vendor see even stronger cost efficiency – on average 32% - versus organizations using a multiple vendor or “best of breed” in-house approach.”

Benefits Outsourcing Cost Factor #3: Self-service functionality

Employee self-service transactions such as access to personal data, changes to benefit plans, and the automation of annual enrollment play a large role in reducing the TCO of benefits administration (as well as raising levels of employee engagement). In fact, a report from the HR Outsourcing Association, (Optimizing HR Delivery Channels) noted that, “The introduction of self-service channels for conducting …benefits inquiries and transactions is one of the greatest contributors to cost reduction and quality improvement in these services over the past ten years”. And in terms of a specific figure, the PricewaterhouseCoopers survey found that, “this strategy results in a 50% lower TCO of workforce administration for large organizations compared with peers managing the function without these features.” The devolution of basic administrative tasks and inquiries to the level of greatest self-interest is core to maximizing outsourcing cost savings.

Benefits Outsourcing Cost Factor #4: Leveraging mobile access

A Bloomberg BusinessWeek research report surveyed 1,000 executives worldwide and found that 66% of organizations either made benefits information available to employees via handheld devices or intended to deploy such access within the next two years. The primary benefit of such deployment is essentially to maximize the effectiveness (and therefore savings accrued) from ESS transactions.

Benefits Outsourcing Cost Factor #5: Legislative compliance

With the current ongoing program of health care reform at the legislative level, outsourcing is becoming even more financially attractive to organizations for whom maintaining the necessary level of internal expertise is becoming cost-prohibitive. A report from the Society for HR Management (Transforming HR through Technology) points out, “Many mandated benefits programs carry significant financial penalties for non-compliance.” By outsourcing responsibility to an external service provider, an organization can not only minimize the risk of non-compliance (and the resulting fines and penalties) but can also ensure a relatively early positive return on investment.

The Cost Savings of Outsourcing Benefits Administration – Final Thoughts

However tempting these potential cost reductions are, the Sourcing Analytics research paper observed the simple truth that, “While the study shows that outsourcing can provide significant reductions in the overall cost for health and welfare benefits administration, those cost savings are not guaranteed. Effective outsourcing requires oversight and review.” In other words, if internal processes and staffing models are not examined and restructured to take advantage of outsourcing arrangements, cost savings may be minimal or even non-existent.

Employee self-service transactions such as access to personal data, changes to benefit plans, and the automation of annual enrollment play a large role in reducing the TCO of benefits administration as well as raising levels of employee engagement.